October was a challenging month for stocks as the S&P 500 ended the month down about 2%, leaving stocks up roughly 9% for the year.  Bonds also faced some headwinds as the 10 Year Treasury Yield rallied, crossing 5% for the first time since 2007.  (YCharts)

Understandably, we’ve had a lot of questions about the recent volatility.  Today we will address 3 of the most common topics:

• Interest Rates – Interest rates have jumped significantly this year, but the economy has managed to digest higher rates with GDP growth hitting 4.9% in the 3^rd quarter.  The future direction of rates is important as significantly higher rates could put pressure on economic growth and stocks.  Inflation, Fed policy, and economic strength are three factors that we’ll be watching closely.

September was a challenging month for stocks as the S&P 500 pulled back almost 5%, while the 10 Year Treasury Yield rallied over 4.6% its highest level since 2007.  The increase in rates was likely driven by the September Fed meeting where the Fed held rates steady, but hinted that we could see another hike before the end of the year. (YCharts)

While volatility can be uncomfortable, we believe that this type of market pull-back is normal and healthy, particularly after a prolonged move higher.  From the lows in October, 2022 to the end of July the S&P 500 had rallied almost 30%.  (YCharts)

We may continue to see more volatility in the short-term but we believe that the recent market move is likely not the beginning of a longer-term downtrend as the underlying trend of the market continues to be positive. As such, we expect to see stocks move higher over the next 9-12 months. 

Coming into August the S&P 500 had been strong, up almost 20% for the year; however, August brought with it a little weakness as stocks took a breather and the S&P 500 closed down about 1.6% for the month. (YCharts) We believe that this type of volatility is normal and healthy for stocks, particularly after a prolonged move higher. 

One potential factor that impacted markets was a jump in interest rates.  The 10 Year US Treasury Yield jumped, peaking at a 15 year high of 4.35%, before closing the month at 4.09%. (YCharts)  Higher rates have the potential to be a headwind as borrowing costs may increase. 

This is something we’ll keep a close eye on.  Below, we’ll outline a few factors that could impact interest rates for the rest of the year:

The second half of the year began on a positive note with the S&P 500 rallying about 3% in July and is now up over 19% for the year.  At one-point last month the Dow Jones Industrial Average was up 13 consecutive days – the longest winning streak since 1987. (YCharts)

These returns have been driven by solid economic data (including better than expected inflation readings) and an optimism that the Fed’s hike last week could be the final one of this cycle.  This month we’re going to review three indicators from our dashboard that have been impacted by the recent strength in stocks:

One silver lining in the current market is that this could be a good time to convert assets from a traditional IRA to a Roth IRA. Converted assets are subject to federal income tax in the year of conversion, which might be a substantial tax bill. However, if assets in your traditional IRA have lost value, you will pay taxes on a lower asset base when you convert.

May was another fairly steady month for stocks with some volatility to close out the month as investors watched the ongoing debt ceiling negotiations carefully.  The S&P 500 closed the month slightly higher, and is now up about 9% year to date.   (YCharts) 

Investors have had a number of headwinds to contend with this year including recession risk, hawkish monetary policy, and the risk of a US debt default (debt ceiling).  Despite these factors, we’ve seen markets rally about 16.5% over the last 8 months (since Oct 1^st). 

After experiencing some volatility in March, stocks settled down in April as the S&P 500 closed the month about 1.5% higher.  We are now a third of the way through the year and it’s been a good start for stocks as the S&P 500 is up about 8.5% year to date. (YCharts)

This month we’re going to highlight three potential market movers that we’ll be watching closely in the weeks and months to come:

We saw increased volatility in stocks and bonds in March, as the S&P 500 rallied to finish the month up about 3.5%. (YCharts)

It was an eventful month of headlines, primarily with turmoil in the banking sector as two banks failed in three days.  Concerns surrounding the banking system became the number one issue for investors, with the subsequent Fed meeting and rate decision a close second.

We’ve received a number of questions about the banking system and will tackle three of the biggest ones below:

1. Are these failures systemic?  At this point, we don’t believe these bank failures are a sign of widespread issues.  One reason for this is that the cost to insure against banks failing increased (as expected), but remained below the levels we saw in 2020 and far below levels seen during the financial crisis.  That said, we will continue to watch this sector carefully and be ready to make adjustments to portfolios if needed.  

After a strong start to the year February brought with it some volatility as the S&P 500 ended the month down about 2.5%, but is still up roughly 3.4% for the year.  We were not surprised to see volatility, and think that we could see more choppiness in the months ahead as investors continue to digest recession risk and potential Fed policy changes.

The impact of these factors is not limited to stocks, but also affects the bond market.  In February the 10 Year US Treasury Yield jumped from 3.52% at the beginning of the month, to 3.92% at month’s end.  For perspective the 10 Year Treasury was yielding 1.83% at this time last year. (YCharts)

Below, we’ll highlight two key groups that are impacted by higher rates:

2023 is off to a good start as both stocks and bonds rallied in January with the S&P 500 up about 6%.  (YCharts) This bounce was welcomed by investors as the mix of economic data suggested the Fed might be able to shift toward a less restrictive stance in the months to come.

That said, we wouldn’t be surprised to see market volatility ahead as we appear to be in an environment where investors are looking for Goldilocks data each month – not too strong (to cause higher inflation), not too weak (a sign of recession), but a “just-right” combination of economic growth at a reasonable pace.  This month we saw some data that gave us a glimpse of what that combination could look like: